Emerging Markets

Poland Has Potential As Top Holding in Frontier Market ETF

July 06, 2008
by Tom Lydon

Krakowpoland With the recent launch of the Claymore/BNY Mellon Frontier Markets (FRN), it is now possible to invest in the first U.S.-listed exchange traded fund (ETF) that provides investors access to up to 41 countries considered “frontier markets.” 

These markets are very important to consider given that many of the emerging markets, such as China, are now approaching more of a developed market status. One of these frontier markets worth noting is Poland.  When looking at FRN’s holdings by country, Poland sits atop the list at 23.5%. 

Since 1990, Poland has pursued policy to liberalize its economy and has prevailed among transition economies. Gross domestic product (GDP) grew by roughly 6.5% in 2007 given rising private consumption, a jump in corporate investment, and EU fund inflows. 

EU membership and accessibility to EU funds have generated a major boost to the economy since 2004. Although unemployment is falling rapidly, it was estimated at 12.8% in 2007, where it sat well above the EU average.  Important industries in the Polish economy include machine building, iron and steel, coal mining, chemicals, shipbuilding, food processing, glass, beverages, and textiles. Poland also has several important natural resources including coal, sulfur, copper, natural gas, silver, lead, salt, amber and arable land.

Poland’s economic performance is likely to improve, but in order to do so it must address certain deficiencies in its business environment. An ineffective commercial court system, a rigid labor code, “bureaucratic red tape,” and lower-level corruption keep Poland’s private sector from performing. 

The new PO/PSL coalition government has made public its intention to enact business-friendly reforms, reduce the growth of public sector spending, lower taxes, and accelerate privatization.

Single-Country ETFs Are World Travelers

July 05, 2008
by Tom Lydon

44746404 Single-country focused exchange traded funds (ETFs) are well-recognized for their investment benefits and instant diversification. They are one of the most simple ways to gain foreign stock exposure across a range of sectors, with less volatility and expense than single stocks.

Single-country ETFs offer instant currency diversification, with precise, and concentrated exposure. They take the guesswork out of single-stock picking from a faraway and unknown economy, says ETF Guide.

For a long time, iShares was one of the only providers of single-country ETFs, but lately we've seen the options expanding. The iShares line has 29 such funds, and this year has seen the launch of a number of single-country funds from Northern Trust, as well, and some of those cover new territories.

Among the offerings are:

  • NETS ISEQ 20 Index Fund (IQE): Covers Ireland; launched June 16
  • NETS PSI 20 Index Fund (LIS): Covers Portugal; launched May 21
  • iShares MSCI Israel Capped Investable Market Index Fund (EIS): up 10.2% since March 31 inception
  • iShares MSCI Malaysia Index Fund (EWM): down 17.5% year-to-date
  • Market Vectors Russia (RSX): up 3.1% year-to-date

iShares MSCI Brazil (EWZ) and iShares MSCI Canada (EWC) are the two top-performing single-country ETFs year-to-date, up 3.5% and 8.9%, respectively.

When considering single-country funds, be sure to look at the holdings and sector/company weightings. If you're already invested in energy, then you might not be interested in Russia's ETF, because it's 42.6% weighted in the sector. Malaysia's ETF is 30.9% weighted in financial services, and if you're skittish about the industry, it may not be the fund for you.

China's ETFs No Fairytale as Three Bears Storm the Markets

July 03, 2008
by Tom Lydon

Goldilocks05As of Wednesday's market close, we entered a bear market that could weigh on stocks and exchange traded funds (ETFs) for the time being. But here's a riddle: if a bear market is typically defined as a market that has fallen 20% off its recent high, what's it called in China, which is down 60%?

Scott Tong for Marketplace says Shanghai is down "three bears" by that math. The problems vexing China are similar to those in the rest of the world: energy prices, automakers and so on.

China is still predicted to grow 8% to 9% this year, and Tong points out that the stock market isn't always so reflective of the broader economy because it's relatively small and heavy in retail investors. That makes the market there more subject to the feelings of the people.

China ETFs have taken a big hit so far this year, after a solid 2007:

  • iShares FTSE/Xinhua China 25 (FXI), down 25.4% year-to-date
  • NETS Hang Seng China Enterprises Index Fund (SNO), launched on May 22
  • Claymore/AlphaShares China Small Cap Index (HAO), down 20.4% since Jan. 30 inception


Looking for the ETF Silver Lining Amid the Clouds?

June 30, 2008
by Tom Lydon

Poll319i With the markets and exchange traded funds (ETFs) getting socked by near-daily bad news, you might be wondering how Pollyanna did it. Wasn't she exhausted?

How can you stay optimistic when:

  • Oil keeps hitting new records, past $143 a barrel this morning.
  • U.S. automakers report their June sales figures, and if recent news is any indication, it's not going to be pretty.
  • The Labor Department is expected to announce that employment shrank for the sixth consecutive month in June.
  • Chief Investment Officer for Advisers Capital Management Charles Lieberman says a 20% decline is considered a bear market - not a mere correction, reports Amy Scott for Marketplace.

The thing is, you have to look for the good, and that's not always so easy to do. This is the beauty of trend following. Some things are down, other things are up. Even when many areas are looking tore up from the floor up, there are other areas still showing strong performance. You just have to be looking for them, because there are a number of ETFs hanging out above their 200-day moving averages, including:

  • Mid-caps have been outperforming their small- and large-cap siblings so far this year, and the iShares S&P MidCap 400 Growth Index (IJK) is 1.2% above its trend-line.
  • Commodities have been solid year-to-date as countries develop and bad weather destroys crops around the world. Among the funds above their trend lines are the PowerShares DB Commodity Index Tracking Fund (DBC), 28.1% above its line, and the iPath Dow Jones-AIG Commodity Index Tracking ETN (DJP), 17% above its line.
  • You may have noticed oil-related ETFs have been getting some attention. United States Oil (USO) is 35% above its line, SPDR S&P Oil & Gas Equipment & Services (XES) is 20.9% above and PowerShares DB Energy (DBE) is 35.6% above.
  • Since new Russian President Dmitry Medvedev took office, the Market Vectors Russia (RSX) has delivered some solid numbers, and it's currently resting 8.7% above its trend line.
  • As the U.S. dollar falls in value, two funds in particular have benefited: the CurrencyShares Euro Trust (FXE), which is 5.2% above its trend line, and the CurrencyShares Swiss Franc Trust (FXF), 5.9% above its line.
  • Market Vectors Steel (SLX) has benefited from a global need for the metal as more emerging markets modernize with new buildings and bridges. The fund is 16.8% above its trend line. The SPDR S&P Metals & Mining (XME) is 26% above its trend line, as well.

See? Now turn that frown upside down.

For full disclosure, some of Tom Lydon's clients own shares of RSX, IJK and DJP.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

iShares Welcomes New Additions To ETF Family

June 26, 2008
by Tom Lydon

108298501_2 Barclays Global Investors made three new additions to the iShares exchange traded fund (ETF) family this week.

  • iShares S&P Global Timber & Forestry Index Fund (WOOD)
  • iShares S&P Global Nuclear Energy Index Fund (NUCL)
  • iShares S&P Global Clean Energy Index Fund (ICLN)

All three funds have an expense ratio of 0.48%.

WOOD will be joining the Claymore/Clear Global Timber (CUT), which tracks companies that own or manage forested land and harvest the timber for commercial use or the sale of wood-based products such as pulp, lumber and paper. It has a low correlation to the broader market, and before CUT launched, only institutional investors had access to this area. 

NUCL will be joining the Market Vectors Nuclear Energy Fund (NLR) which is actually a growing energy source, as China and Russia have signed a pact for $1 billion to build out a nuclear power plant facility. If China is committed to a nuclear energy policy, then it's worth your time to notice related ETFs. PowerShares Global Nuclear Energy Fund (PKN) is also a player in the ranks.

ICLN will join clean energy status with First Trust Nasdaq Clean Edge US Liquid Series Index Fund (QCLN). Reasons to invest in clean energy include the fighting global warming, break away from peak oil prices, improvement of local economies and  possibly make money on some newer trends, such as solar or wind  power. Other ETFs keeping it clean are PowerShares WilderHill Clean Energy ETF (PBW) and Market Vectors Global Alternative Energy ETF (GEX).

iShares has also launched the iShares FTSE China (HK Listed) Index Fund (FCHI), which has an expense ratio of 0.74%. The fund is most heavily allocated in financials, with 32.8% of the holdings, followed by telecommunications at 24.3% and industrials at 14.4%.

ETFs and Sectors to Watch In the Second Half of 2008

June 24, 2008
by Tom Lydon

2000999883 Those who prefer investing with exchange traded funds (ETFs) may have bountiful choices to pick from, as there are several areas worth watching for the latter half of 2008. Can you believe we're already just about halfway through the year?

Billy Fisher for the Street sorts out the three to watch for 2008, Part Two:

1) The Federal Reserve has said it will keep interest rates stagnant for now in an effort to keep the economy in recovery mode. But analysts expect rising rates later in the year to help boost the value of the U.S. dollar.

For today, the dollar finished lower after another round of weak U.S. economic data was released, report Myra P.Saefong and Nick Godt for MarketWatch.

An ETF to capitalize if the greenback turns it around? PowerShares DB US Dollar Index Bullish (UUP), which is down 3.7% year-to-date.

The dollar against the euro and the Japanese yen:


2) On the housing front, sales are still down, and inventory is rising, all the while home prices continue to fall. For the first quarter of this year, they were down 14.1%.

Lowered prices are causing buyers to come out of the woodwork, as bargain hunters have sent home sales up 6.3% in April from March. In bad news, housing starts fell to their 1991 lows, down 3.3% in May, Patrick Rucker for Reuters reports. There have been mixed signals about the health of the sector across the country: in the Northeast, for example, housing starts jumped 61.5%. But starts in the Midwest were down 25%.

When the housing market is once again on solid footing, some of the funds investors can use to take part: SPDR S&P Homebuilders (XHB) and DJ Wilshire REIT (RWR). The funds are respectively down 9.4% and 2.2% year-to-date.


3) China may be full of surprises for the last part of 2008, as they are still a growing nation despite recent hiccups.

Deutsche Bank's economist raised his 2008 and 2009 GDP forecasts to 0.7% and 0.4%, respectively. Moreover, the recent quake should deliver a boost as reconstruction begins.

As for the Olympics, plenty of countries have suffered a post-Olympics hangover, but that's not likely in China, say Alan Wheatley and Chris Buckley for Reuters. That's because Beijing accounts for just 3.7% of Chinese GDP, and Olympics-related capital spending was only 1% of nationwide investment from 2003-2007.

Funds to watch if China mounts a firm turnaround in the second half of this year: iShares FTSE/Xinhua China 25 (FXI) and SPDR S&P China (GXC), which are down 20.4% and 23.3% year-to-date, respectively.


Spanning a New Frontier With ETFs

June 24, 2008
by Tom Lydon

3755880313 Upon any new frontier, the possibilities for growth and prosperity are endless, so investors might be taking a liking to the new frontier exchange traded funds (ETFs) that take the "emerging markets" concept even further.

Frontier countries are countries that are less developed than traditional emerging markets, reports David Hoffman for Investment News. An example of frontier countries can be found in the latest ETF from Claymore, the Claymore/BNY Mellon Frontier Markets ETF (FRN) which gives access to 41 economically  "newborn" countries such as Bahrain, Bangladesh, Bulgaria, Croatia, Egypt, Ghana, Kazakhstan, Lebanon and Pakistan, to name a few.

Poland is the most heavily weighted country in the fund, containing 24.9% of assets. Chile is second, with 21% of assets. As countries grow and change and move from "frontier" to "developed," the index will shift accordingly.

PowerShares, Van Eck, and WisdomTree all have frontier ETFs in the making. Emerging markets like China and Brazil are becoming more correlated with developed markets. As a result, it makes sense to move to the next level and give investors even more opportunities to broaden their horizons.

As emerging markets become more developed, it certainly makes sense that frontier markets should be included in the mix.

Taiwan And China Diminish Animosity For Improved Economy And ETFs

June 23, 2008
by Tom Lydon

155734271 The long standing animosity between mainland China and Taiwan may be near an end, which will help boost both countries' economies, stock markets and exchange traded funds (ETFs).

The long-awaited political breakthrough between Chinese and Taiwanese is showing signs that it's near. Next month, regular flights between the two countries will begin, on a scheduled basis, reports Brendan Soble for Flight Global. This will give a financial boost to 11 carriers, in an effort that will not affect flights from Hong Kong, and Macau, which had carried the Taiwan-Chinese traffic. Six Chinese and five Taiwanese carriers have gotten the go-ahead for 36 weekly flights across the Taiwan Straight.

Meanwhile, Taiwan brokerage houses are going to be allowed to invest in Chinese  counterparts by the end of the year as part of a plan to boost trade with China. The incoming Taiwanese financial regulator, Gordon Chen, is also allowing banks to invest in mainland lenders through offshore subsidiaries.

The new administration with Ma Ying-jeou of China will allow for closer business ties between Taiwanese and mainlanders. Improved relations between Beijing are also promised. To allow for a smooth flow of investments, the FSC has plans to allow the island's brokerages to invest up to 30% of their net assets in China, up from 10% before, according to Rachel Lee and Baker Li for Reuters.

Watch these ETFs to see if the improved relations help boost the economy:

  • iShares FTSE/Xinhua China 25 Index (FXI), down 17.5% year-to-date
  • SPDR S&P China (GXC), down 20.2% year-to-date
  • iShares MSCI Taiwan Index (EWT), up 0.9% year-to-date


Infrastructure Can Be Approached With Broad or Focused ETFs - Your Call

June 20, 2008
by Tom Lydon

601308838 Infrastructure exchange traded funds (ETFs) may be just what your town or country needs to get a good face lift.

Gary Gordon on ETF Expert refers to infrastructure improvement as the need for both developed nations and emerging countries to create certain facilities. Areas that are in need of transportation, communication networks, power plants, drinking water and wastewater systems, possibly in the most environmentally friendly way possible, can be lumped together under the heading of "infrastructure."

There are two of these specific funds:

  • iShares Infrastrucure Fund (IGF): "All-in-one" access to concept; down 8.3% year-to-date.
  • SPDR/FTSE Macquarie Global Infrastructure Fund (GII): Tends to replicate utilities excluding energy infrastructure and transportation infrastructure; down 3.7% year-to-date,

Infrastructure involves a lot more than using water and turning on the lights. Companies that manufacture metals and industrial materials fit the bill, along with companies that build bridges, roads, railways, airports, hospitals and internet access, to name a few. Obviously, there is an array of ways to get some exposure to this sector.

And the good thing about infrastructure is whether it's a developing country or one that's already there, there are always improvements to be made and it's a job that's never done.

Gordon believes these ETFs touch down upon various infrastructure aspects, and all but one of them is sitting in positive territory for the year so far:

  • Market Vectors Steel (SLX), up 29.9% year-to-date
  • PowerShares Water Resources (PHO), up 3% year-to-date
  • PowerShares Clean Tech (PZD), up 1% year-to-date
  • Market Vectors Nuclear Energy (NLR), down 5.8% year-to-date
  • iShares Global Materials (MXI), up 9.7% year-to-date

Gloves Are Off In Mexico's Battle Against Inflation - Can the ETF Win?

June 20, 2008
by Tom Lydon

Fighting Mexico is ready to throw down with inflation, which might turn its exchange traded fund (ETF) back around after negative one-month performance.

The country took two big steps to get control of the situation: first, they raised the benchmark short-term interest rate to 7.75%, from 7.5%. It's the first increase since October, says Tom Petruno for the L.A. Times. Then, the country announced a deal with major food companies to freeze prices on more than 150 pantry staples through the end of the year.

The food-price freeze was supposed to forestall an interest rate hike, but Mexico apparently is extra-serious about fighting inflation. So far, the markets in Mexico like the moves, too: the peso is at five year highs against the dollar.

Will Mexico's commitment to fighting inflation give the Federal Reserve a dash of inspiration? Right now, it's between a rock and a hard place, because tighter credit could be a death sentence for the already-precarious situation of the financial companies.

The iShares MSCI Mexico (EWW) is up 3% year-to-date, but down 6.3% in the last month.